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State obtains $410M settlement with Madoff associate

State obtains $410M settlement with Madoff associate

Attorney General Eric T. Schneiderman yesterday announced he secured a $410 million settlement with J. Ezra Merkin, who controlled four funds that invested over $2 billion with Bernard M. Madoff on behalf of hundreds of investors, including many New Yorkers and charitable organizations.

As a result of Madoff’s Ponzi scheme, the investors in the funds, Ariel Fund Ltd., Gabriel Capital L.P., Ascot Fund Ltd. and Ascot Partners L.P., whose assets were largely handled by Madoff, lost in excess of $1.2 billion, while Merkin received hundreds of millions of dollars in management fees.

Under the agreement, Merkin will pay $405 million to compensate investors over a three-year period, and $5 million to the state of New York to cover fees and costs. This is the first settlement resulting from a government action against Merkin.

“I am proud to announce that we have recovered over $400 million for the investors and charities that were harmed by history’s largest Ponzi scheme. This agreement is a victory for justice and accountability,” said Schneiderman.

In April 2009, the Office of Attorney General charged Merkin with violations of the Martin Act, General Business Law § 352; and Executive Law § 63(12) for concealing Madoff’s control of the Merkin Funds and for breaches of his fiduciary duty to manage the funds prudently. The lawsuit sought damages, disgorgement of all fees by Merkin, and injunctive relief.

Under this agreement, Merkin will pay $410 million, which will be used to return money to investors, under the direction of David Pitofsky and Bart Schwartz, court-appointed receivers overseeing the winding-up of the Merkin Funds. Justice Richard B. Lowe III, who has overseen the Attorney General’s case since its inception, will have continued oversight of the receivers and the implementation of the settlement agreement.

Depending on the size of their losses, eligible investors will be entitled to receive over 40 percent of their cash losses. Pursuant to a claims process, investors who were not aware of Merkin’s delegation to Madoff will receive a defined percentage of their losses, while those who were aware of Madoff’s role will be eligible to receive a smaller recovery.

For nearly two decades, Merkin presented himself as a skilled money manager and used his social and charitable connections to raise over $4 billion from hundreds of individuals, charities, and other investors. Merkin turned over to Madoff all of the money in the Ascot Funds, and a substantial portion of the Ariel and Gabriel Funds.